Here’s an interesting, obvious fact:
Every single sTaRt-Up that ever failed (i.e. went to zero), had a page in their slide deck showing a big juicy market size with billions of dollars that they failed to capture.
Every single sTaRt-Up that ever had some mediocre level of success (i.e. lived for a decade and didn’t go to zero), also had a similar page with similar billions of dollars as their market size that they failed to capture any meaningful % of.
Even the biggest companies that are considered successful by most generic standards (i.e. the founders become billionaires), usually overshoot their initial market size, because the TAM expands over time as you start or acquire more business area. You could argue that Amazon’s TAM in 1995 or Google’s TAM in 2001 was not even pennies on the dollar compared to what their TAM looks like today. Electric cars were a small niche until they were not. (Thanks Tesla!)
When “market size” estimates have absolutely no relationship to what ends up happening, why do entrepreneurs keep plugging arbitrary fictional numbers into slide decks?
It’s because they’re expected to, by VCs and professional investors who like to believe that having these numbers are proof that their investment decisions are rational and quantitative.
And investment, by its very fundamental nature, is not rational, because it requires you to believe in a future that doesn’t yet exist in reality. It’s all just chemical soup in your head. No matter how many signals you collect to give you confidence that that future will come to be, that confidence is still chemical soup in your head.
This applies to ALL decisions, because a decision is something you make when you don’t know what the future will be. Every decision requires you to believe in what could happen.
But the real reason I avoid talking to VCs is not because they think they’re rational while they’re not — it’s because of the whole circus they make around the whole thing. The constant pretending and fake signaling really gets on my nerves.
Entrepreneurship is a crapshoot where the only controllable variables are the team’s creativity, persistence, and average intelligence.
I like investors who mainly care about these three variables, and don’t pretend that the other stuff matters.
When an investor asks me for a “market size” (making it sound like they are going to believe me + actually find some significance in that information), it’s a signal for me to end the meeting immediately and then try to analyze how I got fooled into talking to them in the first place.
If you’re an early stage entrepreneur reading this, maybe consider doing the same.
